The Quality of Fair Value Measures for Property, Plant, and Equipment

Accounting Forum, March 2006

33 Pages Posted: 19 Jun 2002 Last revised: 15 Dec 2011

See all articles by Don Herrmann

Don Herrmann

Oklahoma State University - Stillwater - School of Accounting

Wayne B. Thomas

University of Oklahoma

Shahrokh M. Saudagaran

University of Washington, Tacoma - Milgard School of Business

Date Written: December 1, 2005

Abstract

Based on Statement of Financial Accounting Concepts (SFAC) No. 2, this paper argues for fair value measures of property, plant, and equipment and challenges the primary arguments in support of maintaining the current status quo in the United States - strict historical costs for all property, plant, and equipment unless the asset is impaired. We first provide a summary of the valuation of property, plant, and equipment internationally noting that revaluations to fair value are an acceptable practice under international and many national accounting standards. We also provide a brief historical perspective of accounting in the United States where prior to 1940 the upward valuation of property, plant, and equipment was an acceptable accounting alternative. We then evaluate fair value versus historical cost measures for property, plant, and equipment based on the qualitative characteristics of accounting information in SFAC No. 2. We argue that fair value measures for property, plant, and equipment are superior to historical cost based on the characteristics of predictive value, feedback value, timeliness, neutrality, representational faithfulness, comparability, and consistency. Verifiability appears to be the sole qualitative characteristic favoring historical cost over fair value. Finally, we address key measurement concepts for property, plant, and equipment. The United States could learn from the practices already established in other countries and in international financial reporting standards by reconsidering fair value measures for property, plant, and equipment.

Keywords: fixed assets, fair values, relevance, reliability

JEL Classification: M41, M44

Suggested Citation

Herrmann, Don and Thomas, Wayne B. and Saudagaran, Shahrokh M., The Quality of Fair Value Measures for Property, Plant, and Equipment (December 1, 2005). Accounting Forum, March 2006. Available at SSRN: https://ssrn.com/abstract=312150 or http://dx.doi.org/10.2139/ssrn.312150

Don Herrmann (Contact Author)

Oklahoma State University - Stillwater - School of Accounting ( email )

College of Business Administration
345 Business Building
Stillwater, OK 74078
United States

Wayne B. Thomas

University of Oklahoma ( email )

Michael F. Price College of Business,
307 W Brooks, Rm 212B
Norman, OK 73019
United States
405-325-5789 (Phone)
405-325-7348 (Fax)

Shahrokh M. Saudagaran

University of Washington, Tacoma - Milgard School of Business ( email )

1900 Commerce Street
Campus Box 358420
Tacoma, WA 98402-3100
United States

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